Australian Tax Plan Shakes Up Mining Industry

A proposed new tax on Australian miners has rekindled fears that other mining jurisdictions may adopt similar legislation, hurting the industry and curtailing the pace of global exploration.

At the very least, Australia's plan to levy a 40 percent tax on profits could deter mining investment in the country, raise the price of key natural resources and drive miners to invest in lower tax jurisdictions.

The governments of Mongolia, Zambia, Peru and Ecuador have considered, and in some instances implemented, a windfall profits tax on the mining sector.

Salman Partners analyst Mike Plaster expressed concerns that the Australian proposal could encourage other countries, especially developing economies that have toyed with the idea of a windfall profits tax, to move forward on such proposals.

"I would consider this a very real risk. You just never know what sort of form this could take in other jurisdictions and it could be a lot more onerous," said Plaster.

The proposed "resources super profits tax," or RSPT, could push the effective tax rate on Australian miners from slightly above 40 percent of earnings to closer to 60 percent by fiscal 2013.

"We acknowledge that the Australian decision may be viewed as a precedent for a higher tax burden in Brazil, with a reasonable probability that this risk resurfaces in 2011," Correa said in a note to clients.

Brazil and Australia are the world's largest exporters of iron ore. Chile the world's largest copper exporter is already moving to raise mining royalties temporarily to help fund the rebuilding of towns and infrastructure battered by a massive earthquake earlier this year.

Although Australia's proposal has revived fears about higher taxation, the move could benefit countries like Canada as miners are likely to focus on developing projects in lower tax jurisdictions.

Australia is already one of the most highly taxed mining nations in the world and some analysts fear the new proposal could threaten the competitiveness of miners that operate there.

"On the information provided, we struggle to see why an international company would be more likely to invest with a higher tax regime in place," said RBC Capital Markets analyst Geoff Breen.

"Quite simply, in our view, in the competition for limited capital, the return on proposed Australian projects has diminished in relative terms," Breen said in a note to clients.

Plaster said the Australian proposal makes Canada a more attractive venue for investment in metallurgical coal.

Australia the United States and Canada are the world's largest exporters of metallurgical coal -- a key raw material used in the manufacture of steel.

Miners with operations outside Australia could also benefit from a higher Australian tax as it would likely increase the prices of bulk commodities like iron ore and coal.

"Seaborne iron ore would feel upward price pressure from a resources rent tax, as iron ore exports from Australia make up a large percentage of the seaborne iron ore market," said Dahlman Rose & Co analyst Anthony Rizzuto.

Moreover, the tax could restrain supply from current iron ore operations in Australia and reduce the incentive to invest in exploration, pushing up prices down the road.

The Australian government contends the tax proposal would result in mining investment and mine production increasing over the long term, as more projects become viable.

The proposal envisages an exploration rebate and other benefits for miners, but analysts still believe that the new tax would ultimately harm the economics of most projects.

Mining giants BHP Billiton and Rio Tinto have said the proposal is likely to jeopardize investment. While Australian iron ore explorer Cape Lambert Resources Ltd has already scrapped one of its projects.

A proposed new tax on Australian miners has rekindled fears that other mining jurisdictions may adopt similar legislation, hurting the industry and curtailing the pace of global exploration.
At the very least, Australia's plan to levy a 40 percent tax on profits could...